COMMERCIAL MORTGAGE GLOSSARY
– A –
AMORTIZATION PERIOD – the period or length of time over which the principal portion of
a mortgage loan is scheduled to be paid down through periodic payments.
APPRAISAL– an estimate of the value of a property, made by a qualified professional called
ASSISTED LIVING – type of senior housing that is typified by independent living and
limited assistance to its renters.
AVERAGE DAILY RATE – a hotel rate used to evaluate the average daily rate of a hotel
inclusive of vacancy and seasonality.
– B –
BASIS POINT (BP) – 1/100th of 1% expressed as a margin over an index rate.
BRIDGE/SHORT TERM LOAN – a short-term or interim loan for borrowers who need
more time to find permanent financing or are repositioning a commercial property.
– C –
CAPITAL EXPENDITURES – line items on a profit and loss statement that would not be
expensed on an annual basis. This category would include replacement of major building
systems, such as roofs, etc.
CAPITALIZATION RATE – the ratio of the first year NOI to the asking price (NOI/Asking
price). Not the rate of return.
CMBS (Commercial Mortgage Backed Security) – a bond or other financial obligation
secured by a pool of mortgage loans.
CONDUIT – the financial intermediary that sponsors the conduit between the lender(s)
originating loans and the ultimate investor. The conduit makes or purchases loans from third
party correspondents under standardized terms, underwriting and documents and then,
when sufficient volume has been obtained, pools the loans for sale to investors in the CMBS
CONSTRUCTION LOAN – a short term loan to pay for the construction of commercial
buildings. These loans typically provide periodic disbursements to the builder as each stage
of the building is completed. When construction is completed a take-out or permanent loan is
used to pay off the construction loan.
CONTINGENCY – an element of an agreement that must be satisfied before the total
agreement can be consummated.
COUPON – the coupon on U.S. Government securities expressed as an annual percentage of
face value, is the interest rate the U.S. Government promises to pay to the holder on an
ongoing basis until maturity.
CREDIT TENANT – a tenant, who has obtained a debt rating by S&P or Moody’s of “BBB-” or better.
CREDIT TENANT NET LEASE – a lease with a tenant that has a credit rating of BBB- or better.
– D –
DEBT SERVICE – the periodic payments (principal and interest) made on a loan.
DEBT SERVICE COVERAGE RATIO (or DEBT COVERAGE RATIO) – measures a
mortgaged property’s ability to cover monthly payments defined as the ratio of net operating
income over the periodic payments (principal and interest) made on a loan. A DSCR of less
than 1.0 means that there is insufficient cash flow generated by the property to cover
required debt payments.
DEFEASANCE – a clause in a mortgage that gives the borrower the right to prepay a
commercial mortgage by purchasing Canadian Treasuries in an escrow account to pay off
ongoing debt service.
DUE DILIGENCE – the legal definition: a measure of prudence, activity or assiduity, as is properly to be
expected from, and ordinarily exercised by, a reasonable and prudent person under the particular
circumstances. In CMBS due diligence is the foundation of the process because of the reliance securities
investors must place on the specific expertise of the professionals involved in the transaction.
– E –
EASEMENT – A right granted to another person to use your land for a specific purpose. Most
commonly, easements are granted to public utility and telephone companies for the purpose
of running lines on or under the property or to neighbors for the purpose of using a common
EFFECTIVE GROSS INCOME – gross income of a building if fully rented, less an
allowance for estimated vacancies.
ENCUMBRANCE – Anything that affects or limits the fee simple title to property, such as
mortgages, leases, easements, or restrictions.
ENGINEERING REPORT – report generated by an architect or engineer describing the
current physical condition of the property and its major building systems, i.e., HVAC, parking
lot, roof, etc. The report also determines an amount for calculating replacement reserves, if
ENTITLEMENTS – a right to benefits specified especially by law or contract.
ENVIRONMENTAL REPORT – report generated by qualified environmental firms
to determine potential environmental hazards in a building’s region or within the
ENVIRONMENTAL RISK – risk of loss of collateral value and of lender liability due to the
presence of hazardous materials, such as asbestos, PCB’s, radon or leaking underground
storage tanks on a property.
EQUITY – the difference between the fair market value and current indebtedness, also referred to as
ESCROW – 1. A special account set up by the lender in which money is held to pay for
taxes and insurance. 2. A third party who carries out the instructions of both the buyer and
seller to handle the paperwork at the settlement.
ESTOPPEL CERTIFICATE – A written statement setting forth certain facts about a piece of
real estate, such as the precise amount of indebtedness remaining.
– F –
FAIR MARKET VALUE – an appraisal term for the price which a property would bring in a
competitive market, given a willing seller and willing buyer, each having a reasonable
knowledge of all pertinent facts, with neither being under any compulsion to buy or sell.
FORBEARANCE – The act of refraining from taking legal action despite the fact the mortgage
is in arrears. It is usually granted only when a mortgagor makes a satisfactory arrangement by
which the arrears will be paid at a future date.
FORECLOSURE – the process by which a lender takes back a property on which the
mortgage has defaulted. A service may take over a property from a borrower on behalf of a
lender. A property usually goes into the process of foreclosure if payments are more than 90
days past due.
FREESTANDING – one commercial building meant to be occupied by a single user.
FULL SERVICE – a hotel definition that represents services provided to its guests outside of lodging
(i.e. room service, concierge services, and restaurant).
– G –
GENERAL PARTNERSHIP – in a partnership, a partner whose liability is not limited. All
partners in an ordinary partnership are general partners. A limited partnership must have at
least one general partner.
GROSS INCOME MULTIPLIER – A tool used to assess the approximate value of a rental
property by comparing its rental income with other like properties. It gives the relationship
between the gross rental income and sales price.
GROSS RENT MULTIPLIER – Multiplier: A tool used to assess the approximate value of
a rental property by comparing its rental income with other like properties. It gives the
relationship between the gross rental income and sales price. Also referred to as gross
– H –
– I –
INTERNAL RATE OF RETURN (IRR) – A method of determining the annualized effective
compounded return rate on an investment over time assuming a set of income, expense, and
property value conditions as well as risk. It combines the present worth of the right to receive
future income streams with the present worth of the right to receive a particular profit when
the property is sold.
– J –
JOINT VENTURE – an agreement by two or more individuals or entities to engage in a
single project or undertaking. Joint ventures are used in real estate development as a means
of raising capital and spreading risk. For all practical purposes a joint venture is similar to a
general partnership. However, once the purpose of the joint venture has been accomplished,
the entity ceases to exist.
– K –
– L –
LEASE ASSIGNMENT – an agreement between the commercial property owner and the
lender that assigns lease payments directly to the lender.
LEASE TYPE – Gross, Triple Net (NNN), Net Net (NN), Hybrid, etc.
LEASEHOLD IMPROVEMENTS – the cost of improvements for a leased property, often paid by the
LESSEE – tenant in a building.
LIBOR (London Interbank Offered Rate) – the rate that the most creditworthy
international banks dealing in Eurodollars charge each other for large loans. Rates are quoted
in monthly increments out to 1 year.
LIMITED PARTNERSHIP – one in which there is at least one partner who is passive and
limits liability to the amount invested, and at least one partner whose liability extends beyond
LIMITED SERVICE – a hotel that offers lodging services only.
LOAN–TO–VALUE RATIO (LTV) – the ratio between the principal amount of the mortgage
balance, at origination or thereafter, to the current value of the underlying real estate
collateral. The ratio is commonly expressed to a potential borrower as the percentage of value
a lending institution is willing to finance. The ratio is dynamic, and varies by lending
institution, property type, geographic location, property size, etc.
LOT SIZE – total square footage of the land.
LOW–RISE OFFICE – a commonly used expression referring to an office building that is
too low to require elevator.
– M –
MANAGEMENT FEE – the agreed-upon compensation paid to a property management
company for managing a real estate project. The fee is usually based on a percentage of
effective gross income.
MEZZANINE/SECOND LOAN – a loan secured by a mortgage or trust deed, in which the
lien is junior, or secondary, to another mortgage or trust deed.
MID–RISE – a commonly used expression referring to an office building, that is high
enough to require stairs, but too low to require an elevator.
MIXED USE – a real estate development that contains two or more different uses all
intended to be harmonious and complementary. An example would include a high-rise
building with retail shops on the first two floors, office space on floors three through ten,
apartments on the next ten floors, and a restaurant on the top floor.
– N –
NET OPERATING INCOME (NOI) – total income less operating expenses, adjustments,
etc., but before mortgage payments, tenant improvements and leasing commissions.
NET–NET LEASE (NN) – usually requires the tenant to pay for property taxes and
insurance in addition to the rent.
NET PRESENT VALUE – The method of applying an appropriate discount to cash to be
received in the future to arrive at the present value of those future earnings.
NON-DISTURBANCE AGREEMENT–An agreement that permits a tenant under a lease to
remain in possession of the property for the term of the lease despite any foreclosure
NON–RECOURSE – a mortgage or deed of trust securing a note without recourse allows the
lender to look only to the security (property) for repayment in the event of default, and not
personally to the borrower. A loan not allowing for a deficiency judgment. The lender’s only
recourse in the event of default is the security (property) and the borrower is not personally
– O –
OPERATING EXPENSE – periodic expenses necessary to the operation and maintenance
of an enterprise (e.g., taxes, salaries, insurance, maintenance). Often used as a basis for
ORIGINATION – securing a completed mortgage application from a commercial or residential borrower.
– P –
PERCENTAGE LEASE – commonly used for large retail stores. Rent payments include a
minimum or “base rent” plus a percentage of the gross sales “overage.” Percentages
generally vary from 1% to 6% of the gross sales depending on the type of store and sales
PHASE I – an assessment and report prepared by a professional environmental consultant
who reviews the property – both land and improvements – to ascertain the presence or
potential presence of environmental hazards at the property, such as underground water
contamination, PCB’s, abandoned disposal of paints and other chemicals, asbestos and a wide
range of other potentially damaging materials. This Environmental Site Assessment (ESA)
provides a review and makes a recommendation as to whether further investigation is
warranted (a Phase II Environmental Site Assessment). This latter report would confirm or
disavow the presence of an environmental hazard and, should one be found, will recommend
additional review and/or mitigation efforts that should be undertaken.
PREPAYMENT PENALTY – fees paid by borrowers for the privilege of retiring a loan early.
PRIME RATE – the rate at which banks lend to their most creditworthy customers.
PRINCIPAL – 1. The amount of debt, not including interest, left on a loan. 2. The face amount of the
PRO FORMA – (from Latin pro forma, “according to form”). financial statements showing
what is expected to occur.
– Q –
– R –
RECOURSE – personal liability.
RENT ROLL – a list of tenants leasing a property, which details terms of lease, area leased,
and the amount of rent being paid.
RENT STEP–UP – a lease agreement in which the rent increases every period for a fixed
amount of time or for the life of the lease.
RENTABLE SQUARE FEET (same as Net Leasable Area) – in a building or project, floor
space that may be rented to tenants. The area upon which rental payments are based.
Generally excludes common areas and space devoted to the heating, cooling, and other
equipment of a building.
– S –
SENIOR HOUSING – (includes Assisted Listing, Congregate Care, Senior Apartments and
Skilled Nursing Centers) multi-residential property specifically designed for care of senior
citizens and/or physically disabled persons.
SHADOW ANCHORED – a unanchored shopping center located near an anchored shopping center.
SOLE PROPRIETORSHIP – ownership of a business, with no formal entity as a vehicle or structure.
SPREAD – number of basis points over a base rate index.
STABILIZED OPERATING PROPERTY – the income generated on an annual basis from the
commercial property is stable, consistent and reliable.
STRUCTURAL/ENGINEERING REPORT – a property Condition Report that outlines the
current structural stability or instability of a property. The report will outline immediate costs
needed to repair the property, as well as a maintenance program to maintain the property at
its current status.
– T –
TENANT – one who is given possession of real estate for a fixed period or at will.
TENANT IMPROVEMENTS (TI) – the expense to physically improve the property to attract
new tenants to new or vacated space which may include new improvements or remodeling.
May be paid by tenant, landlord, or both. Typically, tenants are provided with a market rate
TI allowance ($/sq. ft.) that the owner will contribute towards improvements. The tenant
must pay for amounts above the TI allowance desired by the tenant.
TERM – the length of a mortgage.
THIRD PARTY COSTS – costs resulting from third party reports, whether it be
appraisal reports, environmental reports or structural engineering reports.
TITLE INSURANCE – an insurance policy that insures you against errors in the title search – essentially
guaranteeing your, and your lender’s, financial interest in the property.
TRIPLE–NET LEASE (NNN) – a lease that requires the tenant to pay for property
taxes, insurance and maintenance in addition to the rent (also referred to as “Net Net
– U –
UNANCHORED – a tenant in a shopping center, which doesn’t have an anchored tenant.
UNDERWRITING – the process of deciding whether to make a loan based on property
cash flow, credit, and/or other factors.
– V –
VACANCY PERCENT – the percentage of all units or space that is unoccupied or not rented. On a
pro–forma income statement a projected vacancy rate is used to estimate the vacancy
allowance, which is deducted from potential gross income to derive effective gross income.
VACANCY – unoccupied units as a percentage of the total number.
– W –
– X –
– Y –
YIELD – the rate of return on a security, taking into consideration annual interest payments,
purchase price, redemption value, and the time remaining until maturity.
YIELD MAINTENANCE – a prepayment premium that allows investors to attain the same yield as if
the borrower made all scheduled mortgage payments until maturity. Yield maintenance
premiums are designed to make investors indifferent to prepayments and to make
refinancing unattractive and uneconomical to borrowers.
– Z –